Service revenue is what type of account? As a business owner, understanding what type of account the service revenue is is important. Knowing how much service revenue a company generates will aid investors in understanding the profitability of the services a company offers. For business owners, understanding what percentage of their profit comes from service revenue will aid them in better understanding the financial standing of their business as well as guide them in making informed decisions about improving the services they offer, launching new initiatives, and other operational and investment choices.
Companies that are products based, will only report the income from the sales of their products in their income statement. Companies that offer both products and services will record both revenues from sales and revenue from the services they offer. Companies that are strictly service-based will only record the revenue from the services offered. In all the aforementioned, it is important to note that the revenue generated from services rendered is recorded as service revenue.
Service revenue informs companies on how much income they have realized from the services they have offered within a stipulated period. This amount should not be confused with the profits the company made because they are not the same. It is a part of the company’s revenue while the company’s profit is the amount the company gains after deducting its expenses from its total revenue. Here, we shall discuss further what service revenue means and the type of account it is.
What is service revenue?
Service revenue is the revenue earned by a company for services rendered to customers irrespective of the fees being billed or not. The service revenue focuses solely on the income from services rendered and is usually recorded at the beginning of a company’s income statement under the revenue section. It is sometimes also considered an operating revenue account.
The service revenue is part of a company’s income statement along with the other types of revenues that the company generates. A lot of companies record the income from services rendered using the accrual accounting method. This implies that the service revenue is recorded when the transaction occurs, whether the invoice has been prepaid, paid in cash, or received on credit.
This further means that even if a service is rendered on credit, the service revenue arising from it will be recorded on the company’s income statement even before the full balance is paid up. Additionally, when one account is credited, another one is usually debited. Hence increasing one account decreases another one. We shall further discuss how debit and credit work with respect to service revenue later on when discussing its journal entry.
Service providers often combine a variety of skills and options to the services they offer in order to appeal to different kinds of people, provide customer satisfaction and drive up their revenue through increased patronage. A service provider can be an individual, corporate entity, or government agency.
Generally, the type of service a person seeks determines the service provider they seek. For instance, a person will hire a tax professional to take care of their taxes or take their car to the car repair shop when it develops a fault.
A service can involve just one person such as hiring an attorney to represent you; it can also involve a group of people such as when you hire an event planning company to handle your wedding.
Uses of service revenue
- Differentiating income streams
- Analyzing performance
The service revenue account aside from tracking the revenue from services that companies offer to their clients is also useful in the above-listed ways. We shall discuss each use of the service revenue below
Differentiating income streams
When it comes to accounting for the revenue a company makes, having a service revenue account helps with differentiating between income from sales and that gotten from services rendered. This is especially important for companies that are involved in both the rendering of services and the sales of products. If the revenue from sales and services a lumped together into one account, understanding which among the two accounts brings in more profit might be cumbersome. Hence, having a separate account which is the service revenue account for services rendered and the sales account for products sold will aid the company to have a better understanding of how much revenue they get from the services they offer.
Companies often use forecasting to predict future revenue, this means that in order to clearly forecast what amount of revenue to expect, both the service revenue and revenue from sales are important indicators useful in forecasting. For instance, if a company realizes more income from service revenue, they are likely to keep generating more income from there provided they offer services that meet customer expectations. Hence, they can forecast that service revenue will continue to contribute more to their total income.
Additionally, companies that offer subscription-based services such as software providers, cleaners, etc. can forecast the amount of service revenue they are likely to generate per accounting period based on the records of their previous recurring service revenue.
Companies often use the information on their income statement where the service revenue is recorded alongside other revenue sources, expenses, taxes, and interest payments to analyze their performance within a stipulated period using the income statement ratios. The income statement ratios are important financial metrics that utilize the information found on the company’s income statement to analyze various key performances of the company as regards revenue generation, asset utilization, and overall profitability.
Furthermore, companies that offer a wide range of services, can track the expenses related to these various services as well as the time spent to complete a particular service. By so doing, the company will be able to determine which services require less time and expenses as well as those that customers require more frequently. When this is done, the company will be able to better channel its time and resources to services with the best service revenues.
Service revenue classification
- Operating revenue
- Nonoperating revenue
Service revenue is the account that records the amount of money realized by a company for the services it provides either monthly, quarterly, or annually. The sum of a company’s service revenue and its sales equals the total revenue the company makes within the defined period.
The classification of service revenue is dependent on the business model of the company in view. Some companies classify service revenue as operating revenue and some others classify it as nonoperating revenue. This difference in the classification of service revenue is also dependent on how the revenue was realized and how it is utilized in the company’s operation. Let us take a look at the operating and nonoperating revenue below
Generally, all monies a company generates are reported as service revenue on the income statement under the revenue section. It can also be reported as operating revenue. This is because all of a company’s income from its main activities is considered operating income. A company’s main activity could be rendering services or sales of products or both.
For instance, if Anthony runs a car repair shop, all the income generated from the repair of cars would be classified as operating revenue since car repair is his business’s main activity. Hence the classification of his service revenue as operating revenue.
The operating revenue enables business owners to have an idea of whether their business is growing or declining. This can be determined by how much operating revenue the company records and whether the amount is increasing or decreasing. Therefore, a company can look at its operating revenue in different periods to determine its revenue growth.
Service revenue could also be classified as nonoperating revenue for some companies. Nonoperating revenue is all monies generated from activities that are not the main activity of a business. This means that revenues generated from side activities that are not the company’s usual daily activities are considered nonoperating revenue. Examples of the most common nonoperating revenue are revenue from investments, write-downs from business assets, dividend income, etc.
The nonoperating income is usually irregular since it is not the company’s main source of revenue. It is usually recorded after operating income in the company’s income statement. Service revenue is considered nonoperating revenue by companies whose main source of revenue is not rendering services.
For instance, if Mark sells organic hair growth products but occasionally applies the products on the hair of customers who seek this service. Then, the service revenue Mark makes from applying the organic hair product on the hair of customers will be classified as nonoperating revenue. This is because Mark’s main business activity is the sales of organic hair products whereas the service he offers of applying the product to customers’ hair is a side activity that is usually irregular.
Types of service revenue
- Project service revenue
- Recurring service revenue
- Transaction-based service revenue
When a service provider earns service revenue for the services that have been rendered, accounting for it properly is necessary. For effective accounting and record keeping, all service revenue has to be properly recorded in order to track the source. This proper accounting helps understand how a company generates its service revenue irrespective of whether the service rendered was paid for immediately.
Project service revenue
The project revenue includes revenue generated from a single project which is usually an estimation before the project starts. The project revenue may cut across several accounting periods, depending on how long the project takes to get completed. When this happens, the service revenue is divided into different quarters to account for the completed services within the accounting period.
For example, if a construction company gets a contract to build a skyscraper which could take up to one year to complete. If the company completes the foundation within one quarter, builds up the skyscraper in the next, makes the roof and inserts doors and windows in the third quarter, and finishes the painting and other final touches in the last quarter; then, the service revenue from the skyscraper construction will be divided up and recorded in the various quarters until the project is completed.
Recurring service revenue
Recurring revenue is any service revenue that a company earns consistently or simply, any recurring payment for services. The recurring revenue includes weekly, monthly, quarterly, or yearly subscription payments. Companies generally use recurring revenue to predict upcoming services based on previous ones.
For example, a cleaning company can have a number of clients whom they provide cleaning services for within different periods. When these clients use the cleaning company repeatedly, the income generated is considered recurring service revenue.
Transaction-based service revenue
The transaction-based revenue records the service revenue generated from services originating on a transaction basis. This usually includes one-time service revenue for services that most likely occurs only once.
For instance, a startup company that is undergoing a financial downtime might seek the services of a business development manager or a business consultant to evaluate their business model so as to pinpoint why the business is failing and how best to solve the issue. Since this consultation will most likely be used just once by the startup, the service that the business development manager or the business consultant will most likely be used just once, and the service revenue generated is considered a transaction-based service revenue.
Calculating service revenue
Companies that provide services may need to calculate how much service revenue they have earned per time. The service revenue formula aids in easing this calculation, thereby giving business owners a clearer picture of their service revenue.
In order to calculate the service revenue of a company, the total number of customers who required the service will be multiplied by the price of the service rendered. This can be expressed as Service revenue = Number of customers x Average price of services offered.
The above formula is the simplified service revenue formula and can be expanded to include more details about the service that was offered and the kinds of customers who used the service.
Example of service revenue
Assuming Grace owns a car wash that gets patronized by 60 customers in a month. If she charges $13 to wash a car, we can calculate her service revenue for that month using the formula:
Service revenue = Number of customers x Average price of services offered.
Service revenue = 60 x $13 = $780
This means that Grace made $780 in service revenue for the month under review.
Service revenue is what type of account?
Service revenue is an account on the income statement of any service provider be it an individual, corporate organization, or government agency that records income generated from the services rendered to clients. The service revenue is a kine under the revenue section of the income statement. It is therefore a revenue account.
The balance of the service revenue account is important to companies as it helps them in understanding how much revenue they generate from the services they offer. It is also useful in determining how much a service provider needs to make in service revenue in order to stay profitable while serving their clients.
Journal entries for service revenue
Companies usually account for all revenues and profits generated in their balance sheet. Although the service revenue account is usually reported on a company’s income statement as a revenue account, a journal entry has to be made for it too.
Therefore, understanding how to record the service revenue as either debit or credit is important so as to keep a company’s books of account well organized and up to date. The income statement gives a summary of a company’s revenue and expenses in a defined accounting period. Below is an example of how an income statement looks like
|Cost of goods sold||8,900|
|Total operating expenses||58,260|
|Net Income Before Tax||38,540|
|Income tax expenses||5,880|
|Net Income after Tax||32,660|
When a company records service revenue depends on the accounting system the company uses. If the company uses cash-basis accounting, it means transactions on the service revenue account will only be recorded when the payment for the service rendered is received. For companies that use the accrual accounting system, a transaction gets recorded once it occurs irrespective of being paid for in cash or taken on credit.
Another additional accounting method in use is double-entry bookkeeping accounting. Here, when one account is credited, another is debited. This is done to ensure that all transactions balance each other. Usually, the service revenue account balance decreases when debited and increases when credited.
The service revenue may be classified as either debit or credit depending on when the service is provided. Service revenue received in advance for services that are yet to be offered is typically recorded as credits on the income statement under an asset account called deferred expenses whereas when received from services that have already been offered is recorded as a debit on the income statement.
The journal entry for a service that was paid for in cash is recorded as a debit to the cash account and a credit to the service revenue account. If for instance, John contracts a cleaning company to clean his home and paid $32 for the service, the cleaning company will make a journal entry for this service revenue as seen below
When a service is rendered on credit, it is recorded as a debit to the accounts receivable and a credit to the service revenue account. If for instance, Williams had his hair cut for $8 but does not pay for the haircut, opting to pay later. The service is said to be rendered on the account and the barber will record the transaction as follows
Continuing with the haircut example of Williams above, when he pays for the haircut, later on, the barber will make a journal entry with a debit to the accounts payable and a credit to the accounts receivable as follows:
Based on our discussion, we have seen that the service revenue account is a revenue account in the income statement of companies. The service revenue accounts for revenue generated from services rendered to clients and is recorded per the accounting system a company uses. The service revenue earned by a company is a key performance indicator of how well or how poorly a company is doing in relation to the services they offer.
For startups, the service revenue when judiciously used can aid in the growth of the company. Matured companies can use this revenue to increase their retained earnings thereby broadening their capital base. Both startups and established companies use the information provided by the balance of their service revenue to ascertain if the services they provide are up to par with customer expectations. They are also useful in predicting future income especially as regards recurring service revenue.
Keeping adequate and proper records of service revenue is also key in ensuring that a company’s books of account a well organized, updated, and balanced.